Economic growth is not “natural”: re-thinking current economic challenges
[Reproduced from the here on the WEA Pedagogy Blog]
Since the late 1980s, the World Bank has been defending a policy agenda that reinforces the free market model of endogenous economic growth. In this model human capital plays an outstanding role since the acquisition of abilities would increase productivity levels and, as a result, income levels. This is because level of product per worker depends on the increase of productivity. Regarding the human capital model, long run growth in each country is analysed considering the particular features of infrastructure and human capital. The divergences verified in the levels of product per worker among different countries can be attributed to the abilities accumulated by labour and to the infrastructure of the economies. The emergence and diffusion of the model of endogenous growth reflected the intellectual victory of ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice. Considering the relevant economic outcomes of this intellectual victory, the main question that arises in the context of economics education is: What is at stake in the economic discourse that privileges the economic competitive order as the pillar of economic growth?
The competitive order, as a necessary one, is the central pillar of Hayek’s theoretical construction. Hayek’s economic discourse “naturalizes” the competitive market as a superior arrangement. However, the “naturalization” of the competitive market – by considering it a “natural” arrangement – is in reality undermined by political interests that play a crucial role in economic and political decision procedures, and in the institutional management of such issues.
Taking into account a real-world approach to economic growth, it is relevant to highlight the ideas of Keynes, Minsky, Kalecki, Rifkin in order to re-think current economic growth challenges
John Maynard Keynes enhanced a more fruitful comprehension of the real-world where the outcomes of the entrepreneurs’ decisions do not behave stochastically, that is to say, they are not predictable. In his opinion, the process of decision making is based on conventions. As uncertainty is inherent to all entrepreneurs’ decisions, Keynes relied on the concepts of credibility and degree of confidence in a conventional judgment that is historically built within the markets. In a specific historical setting, the average opinion of entrepreneurs on future scenarios shapes a convention based on a precarious set of expectations about the behaviour of aggregate demand (consumption, investment, net exports, for example). Keynes focused the analysis on the expectations associated with investment decisions in a business environment where uncertainty about the future pervades the decision-making process. The very nature of wealth management under uncertainty in a monetary economy is the cause of business instability. In this sense, due to uncertainty about the future, entrepreneurs could postpone spending decisions and search for alternative forms of wealth management. One of the main theses in his contributions to policy making, as opposed to the classical economists that defend the free-market system, is that government policies and actions could play a fundamental role in shaping a business environment that could reduce uncertainty and favour investment decisions.
- Finance and business cycles
Hyman Minsky considered the role of finance in the business cycle and developed the financial instability hypothesis which states that financial crises are inherent in the capitalist economy. From the Keynesian tradition, Minsky considered the capitalist economy as a set of interrelated balance sheets and cash flows among income-producing companies, households and banks. Minsky adds to our understanding that banks play a crucial role in determining the path of sustainable economic growth since investment decisions are affected by available finance. Through the period of boom, entrepreneurs borrow from banks and accumulate debts. A sentiment of euphoria takes over and entrepreneurs begin to be over-optimistic in their short-term expectations while financial innovations impact upon banks’ assets and liabilities.
During the expansionary period of the business cycle, investment demand increases, and so does the demand for finance and funding. However, as financial fragility grows, lower levels of loans increase uncertainty and pessimism in the economy. Banks become unwilling to lend money because of higher credit risk since income flows turn out to fall short of debt repayment plans. As the investment decisions collapse, through the multiplier process, employment, income and consumption fall leading to a recession. If the financial crisis also leads to a sharp decline in prices, this can result in debt deflation where asset prices fall. In short, while considering the relevance of investment as the unstable component of aggregate demand, the Minskyan approach also points out how banks’ strategies and weak financial regulation tend to induce financial fragility.
- Income distribution
Michael Kalecki’s theoretical contribution elucidates how profits grow throughout cyclical fluctuations and economic crises when the capitalist class strengthens its power relative to workers. Besides, the Polish economist shows how the evolution of income distribution affects the evolution of aggregate income. The dynamics of income and employment mainly depends on the level of spending of the capitalist class. Given the income distribution in each economic sector, “the capitalists earn what they spend”. However, the aggregate level of the workers’ consumption is subordinated to the consumption and investment decisions of the capitalist class. That is why Kalecki states “the workers spend what they earn”. In addition, his analysis of the oligopolistic trends in contemporary capitalism sheds light on important distributive issues at the micro level. The analysis of the role of the markup over prices introduces distributive challenges – not just between capitalists competing for market shares but also between capitalists and workers. Indeed, the evolution of prices depends both on the market power of firms and on the trade union struggles to win higher nominal and real wages.
- Technology and labour conditions
Technology transforms the labour scenario as the result of the diffusion of new practices at the micro-level. More recently, the technological impact on the future of work was analysed in depth by Jeremy Rifkin. According to him, we are facing a new phase of history – a Third Industrial Revolution – that is characterized by the steady and inevitable decline of jobs in the production and marketing of goods and services. Today, the Third Industrial Revolution is a convergence of internet and renewable energy. The internet technology and renewable energies are currently starting to merge in order to build a new infrastructure for a Third Industrial Revolution (TIR) that will change the distribution of economic power in the 21st century. Indeed, changes in power will provoke a fundamental reordering of human relationships – from hierarchical to lateral power – that will impact the way we conduct economic and social activities. The intelligent TIR infrastructure—the Internet of Things—will virtually connect every aspect of economic and social life via sensors and software to the TIR platform. The connections will feed Big Data to every node—businesses, homes, vehicles, etc. — in real time. In turn, the Big Data will be analysed with advanced analytics, transformed into predictive algorithms, and programmed into automated systems. On behalf of this high-technology revolution, the number of people underemployed or without work will rise sharply since computers, robotics, telecommunications, and other cutting-edge technologies are replacing human beings in manufacturing, retail, and financial services, transportation, agriculture, and the government sector. In truth, in an increasingly automated world, workers are being polarized into two forces: on one side, an elite that controls and manages the high-tech global economy; and on the other side, a growing number of displaced workers who have few prospects for meaningful job opportunities.
In contemporary Western societies, most people experience a feeling of uneasiness about the current model of growth that reveals an unsustainable path. For many, the outstanding feeling is that, in current societies, the outcomes of so called “progress” have been economic instability, deleterious working conditions and inequality.
Our critical gaze is fixated on the mainstream mode of thinking about economic growth that obscures current real-world challenges. In this attempt, rethinking relevant theoretical issues about economic growth indicates the need for a deep reformulation in the economics curriculum.
Kalecki, M. (1954) Theory of Economic Dynamics. London: Allen, Unwin.
Keynes, J. M. (2010 ) The General Theory of Employment, Interest, and Money.Mansfield Center, Connecticut: Martino Publishing.
Minsky, H. P. (2008) Stabilizing an Unstable Economy. New York: McGraw Hill.
Rifkin, J. (2011) The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World. Palgrave Macmillan
World Bank (2004) Making Services Work for Poor People, World Development Report Copublication of the World Bank and Oxford University Press.
From: pp.8-9 of World Economics Association Newsletter 6(5), October 2016